<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-5260
REMEDYTEMP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 95-2890471
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
32122 CAMINO CAPISTRANO
SAN JUAN CAPISTRANO, CALIFORNIA 92675
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (714) 661-1211
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES / / NO /X/
As of August 16, 1996 there were 8,888,333 shares of common stock of the
Registrant outstanding.
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<PAGE> 2
REMEDYTEMP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Balance sheet -- June 30, 1996 and October 1, 1995......................... 2
Statement of income -- three months and nine months ended June 30, 1996 and
July 2, 1995............................................................. 3
Statement of shareholders' equity -- for the years ended October 2, 1994
and October 1, 1995, and the nine months ended June 30, 1996............. 4
Statement of cash flows -- nine months ended June 30, 1996 and July 2,
1995..................................................................... 5
Notes to financial statements.............................................. 6
Management's discussion and analysis of financial condition and results of
operations............................................................... 9
PART II -- OTHER INFORMATION
Item 4 Submission of matters to a vote of security holders................ 13
Item 6 Exhibits and reports on Form 8-K................................... 13
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
REMEDYTEMP, INC.
BALANCE SHEET
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1996
JUNE 30, PRO FORMA OCTOBER 1,
1996 (NOTE 3) 1995
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ $ $ 2,204
Accounts receivable.......................................... 37,106 37,106 33,068
Prepaid expenses and other current assets.................... 3,250 3,250 2,248
Current portion of net investment in direct financing
leases.................................................... 170 170 175
Deferred income taxes........................................ 885
------- ------- -------
Total current assets................................. 40,526 41,411 37,695
Fixed assets, net.............................................. 4,928 4,928 4,340
Other assets................................................... 1,347 1,347 843
Net investment in direct financing leases...................... 502 502 618
------- ------- -------
$47,303 $48,188 $43,496
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 2,885 $ 2,885 $ 519
Distributions payable to shareholders........................ 2,203
Accrued workers' compensation................................ 6,443 6,443 6,733
Accrued expenses, principally payroll and related costs and
benefits.................................................. 10,547 10,547 8,544
Debt......................................................... 4,000 4,000 6,700
Current portion of capitalized lease obligation.............. 408 408 383
Deferred income taxes........................................ 220 167
------- ------- -------
Total current liabilities............................ 24,503 26,486 23,046
Deferred income taxes.......................................... 9,070
Capitalized lease obligation................................... 840 840 1,142
------- ------- -------
25,343 36,396 24,188
------- ------- -------
Commitments and contingent liabilities
Shareholders' equity (Note 2):
Preferred stock, par value $.01; authorized 5,000 shares;
none outstanding
Class A common stock, $.01 par value; authorized 50,000
shares; 2,265 issued and outstanding...................... 23 23 23
Class B non-voting common stock, $.01 par value;
4,530 authorized, issued and outstanding.................. 45 45 45
Additional paid-in capital................................... 84 8,165 84
Retained earnings............................................ 21,808 3,559 19,156
------- ------- -------
Total shareholders' equity........................... 21,960 11,792 19,308
------- ------- -------
$47,303 $48,188 $43,496
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 4
REMEDYTEMP, INC.
STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ---------------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
1996 1995 1996 1995
-------- ------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Direct sales.......................................... $ 47,222 $36,437 $130,424 $103,957
Licensed sales........................................ 25,013 16,336 70,538 41,723
Franchise royalties................................... 711 636 2,058 2,058
Initial franchise fees................................ 10 59 49 161
-------- ------- -------- --------
Total revenues.............................. 72,956 53,468 203,069 147,899
Cost of direct sales.................................. 36,700 27,821 100,320 79,288
Cost of licensed sales................................ 18,640 12,229 52,869 31,363
Licensees' share of gross profit...................... 4,309 2,768 11,863 6,942
Selling and administrative expenses................... 9,822 8,693 28,661 25,911
Depreciation and amortization......................... 539 394 1,478 1,021
-------- ------- -------- --------
Income from operations...................... 2,946 1,563 7,878 3,374
Other income:
Interest income (expense), net...................... (25) (12) (61) (36)
Other, net.......................................... 219 458 663 896
-------- ------- -------- --------
Income before provision for income taxes............ 3,140 2,009 8,480 4,234
Provision for income taxes............................ 47 30 127 63
-------- ------- -------- --------
Net income............................................ $ 3,093 $ 1,979 $ 8,353 $ 4,171
======== ======= ======== ========
Unaudited pro forma data
(Note 3)
Income before income taxes............................ $ 3,140 $ 2,009 $ 8,480 $ 4,234
Provision for income taxes............................ 1,256 804 3,392 1,694
-------- ------- -------- --------
Pro forma net income.................................. $ 1,884 $ 1,205 $ 5,088 $ 2,540
======== ======= ======== ========
Pro forma net income per share........................ $ 0.25 $ 0.68
======== ========
Weighted average number of shares..................... 7,431 7,431
======== ========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
REMEDYTEMP, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL
--------------- --------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 2, 1994............ 2,265 $23 4,530 $45 $84 $13,677 $13,829
Net income.......................... 6,400 6,400
Distributions to shareholders....... (921) (921)
----- --- ----- --- --- ------- -------
Balance at October 1, 1995............ 2,265 23 4,530 45 84 19,156 19,308
Unaudited Information:
Net income.......................... 8,353 8,353
Distributions to shareholders....... (5,701) (5,701)
----- --- ----- --- --- ------- -------
Balance at June 30, 1996.............. 2,265 $23 4,530 $45 $84 $21,808 $21,960
===== === ===== === === ======= =======
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 6
REMEDYTEMP, INC.
STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------
JUNE 30, JULY 2,
1996 1995
--------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income............................................................. $ 8,353 $ 4,171
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 1,478 1,021
Provision for losses on accounts receivable....................... 1,014 855
Changes in assets and liabilities:
Accounts receivable............................................ (5,052) (4,275)
Prepaid expenses and other current assets...................... (1,002) (740)
Net investment in direct financing leases...................... 121 (269)
Other assets................................................... (504) (430)
Accounts payable............................................... 2,366 413
Accrued workers' compensation.................................. (290) 131
Accrued expenses............................................... 2,003 4,987
Deferred taxes................................................. 53 50
-------- --------
Net cash provided by (used in) operating activities................. 8,540 5,914
-------- --------
Cash flows used in investing activities:
Purchase of fixed assets............................................ (2,066) (1,605)
-------- --------
Net cash used in investing activities............................... (2,066) (1,605)
-------- --------
Cash flows provided by financing activities:
Borrowings under line of credit agreement........................... 10,348 1,329
Repayments under line of credit agreement........................... (13,048) (4,450)
Repayments under capital lease obligation........................... (277) (477)
Proceeds from sale/leaseback agreement.............................. 782
Distributions to shareholders....................................... (5,701)
-------- --------
Net cash provided by (used in) financing activities................. (8,678) (2,816)
-------- --------
Net (decrease) increase in cash and cash equivalents..................... (2,204) 1,493
Cash and cash equivalents at beginning of period......................... 2,204 1,330
-------- --------
Cash and cash equivalents at end of period............................... $ 0 $ 2,823
======== ========
Other cash flow information
Cash paid during the period for interest............................... $ 147 $ 109
Cash paid during the period for income taxes........................... 100 5
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 7
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying balance sheet at June 30, 1996, and the statements of
income and of cash flows for the nine month periods ended June 30, 1996 and July
2, 1995, are unaudited. These statements have been prepared on the same basis as
the Company's earlier audited financial statements and in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results of these interim
periods. These unaudited financial statements should be read in conjunction with
the audited financial statements included in the Company's Registration
Statement on Form S-1 as filed with the Securities and Exchange Commission and
declared effective on July 10, 1996.
2. INITIAL PUBLIC OFFERING AND RECAPITALIZATION
On July 16, 1996, the Company completed an initial public offering of 3,565
shares of its Class A Common Stock at $13.00 per share (the Offering) of which
2,093 were sold by the Company and 1,472 were sold by certain pre-Offering
shareholders. The net proceeds to the Company from the sale of the 2,093 shares
of Class A common stock are estimated to be $23,708, after deduction of the
underwriting discount of $1,905 and estimated expenses related in the offering
of $1,600. A portion of the net proceeds were used to finance distributions to
the Company's pre-Offering shareholders (see Note 3) with the remaining balance
reserved for working capital and other general corporate use. The Company did
not receive any of the proceeds from the sale of the shares of common stock
offered by the pre-Offering shareholders.
Concurrent with the offering, the Company (i) effected a 1.812-for-1 stock
split of its outstanding voting and non-voting common stock, and (ii) amended
its Articles of Incorporation to provide for the issuance of up to 5,000 shares
of preferred stock, par value $.01, an increase in the number of voting common
shares authorized from 10,000 to 50,000, a reclassification of the voting and
non-voting common stock, and a decrease in the number of authorized non-voting
common shares from 7,500 to 4,530. Share and per share amounts for all periods
presented have been adjusted to give retroactive effect to the above.
3. PRO FORMA INFORMATION
Unaudited pro forma net income and net income per share
Prior to its initial public offering, as discussed in Note 2, the Company
elected treatment as an S corporation for federal and state income tax purposes.
Pro forma net income represents net income after pro forma provision, using a
tax rate of 40%, to reflect the estimated income tax expense of the Company as
if it had been subject to normal federal and state income taxes for the period.
Pro forma net income per share (unaudited) is computed by using the
weighted average number of common and common equivalent shares outstanding
during the period, adjusted to include the estimated number of shares required
to be sold by the Company to prepay distributions to the pre-offering
shareholders totaling $7,203 (636 shares as calculated based on the estimated
net proceeds from the initial public offering -- see Note 2) including a $5,000
distribution paid in May 1996 and a $2,203 pro forma distributions payable to
the pre-offering shareholders at June 30, 1996. The pro forma net income per
share does not give effect to distributions that may be paid from earnings
generated subsequent to June 30, 1996 through the termination date of the
Company's S corporation status. The computation of pro forma weighted average
shares outstanding gives effect to the stock split being effected in connection
with the Offering (See Note 2). Historical net income per share has not been
presented in view of prior period S corporation status.
6
<PAGE> 8
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Unaudited pro forma balance sheet
In conjunction with the Offering, the Company terminated its S corporation
status. As a result, the Company is required by the Internal Revenue Service
Code to change its method of accounting for income tax reporting purposes from
the cash basis to the accrual basis. The termination will result in a
non-recurring net charge to earnings in the fourth quarter of fiscal 1996
resulting from differences in the tax treatment of certain of the Company's
assets and liabilities under the cash and accrual methods of accounting and is
reflected through an increase in current and deferred income tax liabilities,
partially offset by an increase in the Company's deferred tax assets. The actual
current and deferred income tax assets and liabilities and the related income
tax provision will be recorded in the fourth quarter of fiscal 1996, based upon
temporary differences as of the effective date of the termination. The Company
has not yet finalized its detailed calculation of the current and deferred
income tax assets and liabilities and the related income tax provision. The
Company's unaudited pro forma consolidated balance sheet as of June 30, 1996
includes adjustments which increase aggregate deferred tax assets by $885, and
deferred tax liabilities by $9,070 assuming the Company ceased to be treated as
an S corporation on June 30, 1996. Had the Company elected to terminate its S
corporation status at June 30, 1996, the charge to earnings would have been
$7,965. The effect of the change and the actual charge to earnings may vary
depending upon the Company's results of operations and financial information as
of July 9, 1996, the effective date of the S corporation status termination. The
Company has calculated the pro forma deferred tax assets and liabilities and
provision for income taxes using the asset and liability approach in accordance
with SFAS 109.
The following presents the pro forma deferred tax assets and liabilities
assuming the Company ceased to be treated as an S corporation on June 30, 1996.
<TABLE>
<S> <C>
Workers' compensation..................................... $ 2,508
Other liabilities and accruals............................ 1,042
Depreciation.............................................. 484
Bad debts................................................. 520
--------
Gross deferred tax assets....................... 4,554
Valuation allowance.......................................
--------
4,554
S corporation cash basis accounting adjustment............ (12,739)
--------
Gross deferred tax liabilities.................. (12,739)
--------
Net deferred tax liability................................ $ (8,185)
========
</TABLE>
Additionally, the unaudited pro forma balance sheet includes an adjustment
to reflect an estimated $2,203 distribution to be paid to the Company's
pre-Offering shareholders representing the estimated income tax obligations of
the Company's pre-Offering shareholders on undistributed S corporation earnings
from October 2, 1995 through June 30, 1996 (the "Assumed Distribution"). The
actual amount of the Assumed Distribution may be significantly higher depending
upon the Company's cash basis taxable income through the termination date of the
Company's S corporation status. The pro forma balance sheet does not give effect
to distributions that may be paid from S corporation earnings generated after
June 30, 1996.
The unaudited pro forma balance sheet includes the reclassification of
remaining S corporation retained earnings to additional paid-in capital. The
amount of retained earnings which is not reclassified represents the Company's C
corporation retained earnings prior to October 1, 1987, the effective date of
the Company's initial S corporation election.
7
<PAGE> 9
REMEDYTEMP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following provides a summary reconciliation of the effects of the
unaudited pro forma adjustments to the Company's retained earnings as of June
30, 1996:
<TABLE>
<S> <C>
Unaudited balance as of June 30, 1996...................... $21,808
Declared distribution to shareholders...................... (2,203)
Pro forma income tax charge -- net......................... (7,965)
Reclassification of remaining S corporation retained
earnings................................................. (8,081)
------
$ 3,559
======
</TABLE>
4. SUBSEQUENT EVENTS
a) On July 10, 1996, the Company granted options to purchase 422,496 shares
of Class A Common Stock to certain of its directors, executive officers and
employees pursuant to the 1996 Employee Stock Incentive Plan at the initial
public offering price of $13.00 per share. Additionally, on July 25, 1996, the
Company granted options to purchase 20,000 shares of Class A Common Stock to
certain of its directors at $13.00 per share.
b) Subsequent to the completion of the Offering, the Company repaid all
amounts borrowed under its line of credit.
8
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, management's discussion and analysis
includes certain forward-looking statements, including those related to the
Company's growth and strategies, regarding events and financial trends which may
affect the Company's future operating results and financial position. The
Company's actual results and financial position could differ materially from
those anticipated in the forward-looking statements as a result of competition,
the availability of sufficient personnel, and other risks and uncertainties as
described in detail under the "Risk Factors" section and elsewhere in the
Company's Prospectus dated July 10, 1996.
RESULTS OF OPERATIONS
For the Three Months Ended June 30, 1996 Compared to the Three Months Ended
July 2, 1995
Total revenues increased 36.4% or $19.5 million from $53.5 million for the
three months ended July 2, 1995 to $73.0 million for the three months ended June
30, 1996, due primarily to volume increases attributable to increased billings
at existing offices (primarily in the light industrial business segment),
expansion of services, including EDGE, and 18 new offices opened since the prior
period. The Company's ability to continue to increase revenues depends upon many
factors, including existing and emerging competition, the availability of
working capital to support such growth, and the Company's ability to maintain
margins in the face of pricing pressures, find and retain new qualified
licensees and office managers, recruit and train additional qualified temporary
personnel, and manage costs. There can be no assurance that the Company's
revenues will continue to increase.
Total cost of direct and licensee sales increased 38.2% or $15.3 million
from $40.1 million for the three months ended July 2, 1995 to $55.3 million for
the three months ended June 30, 1996. Total cost of direct and licensee sales as
a percentage of revenues increased from 74.9% for the three months ended July 2,
1995 to 75.9% for the three months ended June 30, 1996 due to the conversion of
two franchises to licensees and the commensurate decline in franchise royalty
revenues (which have no cost of sales and minimal related operating expenses).
The Company's business mix, cost of direct sales as a percentage of direct
sales, and cost of licensee sales as a percentage of licensee sales remained
relatively stable. Many factors, including increased wage costs or other
employment expenses, could have an adverse effect on the Company's cost of
direct and licensee sales.
Licensees' share of gross profit represents the net payments to licensees
based upon a percentage of gross profit generated by the licensee operation.
Licensees' share of gross profit increased 55.7% or $1.5 million from $2.8
million for the three months ended July 2, 1995 to $4.3 million for the three
months ended June 30, 1996. Licensees' share of gross profit as a percentage of
total revenues increased from 5.2% for the three months ended July 2, 1995 to
5.9% for the three months ended June 30, 1996. This increase resulted from an
increase from 30.6% to 34.3% in the percentage of total revenues derived from
licensees as a percentage of total revenue.
Selling, general and administrative expenses (including depreciation and
amortization) increased 14.0% or $1.3 million from $9.1 million for the three
months ended July 2, 1995 to $10.4 million for the three months ended June 30,
1996. Selling, general and administrative expenses as a percentage of total
revenues decreased from 17.0% for the three months ended July 2, 1995 to 14.2%
for the three months ended June 30, 1996, largely due to the Company's total
revenues expanding more rapidly than selling, general and administrative
expenses. The Company has implemented several cost saving measures to maintain
or reduce its level of selling, general and administrative expenses as a
percentage of total revenue. Such measures include the installation of a
Company-wide expense budgeting program to make corporate managers more
accountable for their operating expenditures and the initiation of a profit
sharing plan at the office level to pay to office and area managers based on
office location operating profit. There can be no assurance that selling,
general and administrative expenses will not increase in the future, both in
absolute terms and as a percentage of total revenues, and increases in these
expenses could adversely affect the Company's profitability.
9
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating income increased 88.5% or $1.4 million from $1.6 million for the
three months ended July 2, 1995 to $2.9 million for the three months ended June
30, 1996 due to factors described above. Operating income as a percentage of
revenues increased from 2.9% for the three months ended July 2, 1995 to 4.0% for
the three months ended June 30, 1996.
Income before income taxes increased 56.3% or $1.1 million from $2.0
million for the three months ended July 2, 1995 to $3.1 million for the three
months ended June 30, 1996 due to the factors described above. As a percentage
of total revenues, income before income taxes increased from 3.8% in the three
months ended July 2, 1995 to 4.3% in the three months ended June 30, 1996.
For the Nine Months Ended June 30, 1996 Compared to the Nine Months Ended July
2, 1995
Total revenues increased 37.3% or $55.2 million from $147.9 million for the
nine months ended July 2, 1995 to $203.1 million for the nine months ended June
30, 1996 due primarily to volume increases attributable to increased billings at
existing offices (primarily in the light industrial business segment), expansion
of services, including EDGE, and 18 new offices opened since the prior period.
Total cost of direct and licensee sales increased 38.4% or $42.5 million
from $110.7 million for the nine months ended July 2, 1995 to $153.2 million for
the nine months ended June 30, 1996. Total cost of direct and licensee sales as
a percentage of revenues increased from 74.8% for the nine months ended July 2,
1995 to 75.4% for the nine months ended June 30, 1996 due to the conversion of
two franchises to licenses and the commensurate decline in franchise royalty
revenues (which have no cost of sales and minimal related operating expenses).
Licensees' share of gross profit increased 70.9% or $4.9 million from $6.9
million for the nine months ended July 2, 1995 to $11.9 million for the nine
months ended June 30, 1996. Licensees' share of gross profit as a percentage of
total revenues increased from 4.7% for the nine months ended July 2, 1995 to
5.8% for the nine months ended June 30, 1996. This increase resulted from an
increase from 28.2% to 34.7% in the percentage of total revenues derived from
licensees as a percentage of total revenue.
Selling, general and administrative expenses (including depreciation and
amortization) increased 11.9% or $3.2 million from $26.9 million for the nine
months ended July 2, 1995 to $30.1 million for the nine months ended June 30,
1996. Selling, general and administrative expenses as a percentage of total
revenues decreased from 18.2% for the nine months ended July 2, 1995 to 14.8%
for the nine months ended June 30, 1996, largely due to the Company's total
revenues expanded more rapidly than selling, general and administrative
expenses.
Operating income increased 133.5% or $4.5 million from $3.4 million for the
nine months ended July 2, 1995 to $7.9 million for the nine months ended June
30, 1996 due to the factors described above. Operating income as a percentage of
revenues increased from 2.3% for the nine months ended July 2, 1995 to 3.9% for
the nine months ended June 30, 1996.
Income before income taxes increased 100.3% or $4.2 million from $4.2
million for the nine months ended July 2, 1995 to $8.5 million for the nine
months ended June 30, 1996 due to the factors described above. As a percentage
of total revenues, income before income taxes increased from 2.9% in the nine
months ended July 2, 1995 to 4.2% in the nine months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operating activities was $8.5 million and $5.9 million
for the nine months ended June 30, 1996 and July 2, 1995, respectively. The
increase in cash flow from operating activities for the nine months ended June
30, 1996, as compared to the same period in fiscal 1995 was due to an increase
in net income and a decline in the rate of increase of accounts receivable,
prepaids and accrued expenses.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Cash used for purchases of fixed assets, which are generally for computers
and peripherals and office furniture and equipment, totaled $2.1 million and
$1.6 million for the nine months ended June 30, 1996 and July 2, 1995,
respectively. The increase during fiscal 1996 primarily reflects expenditures
for computers, related software and peripheral equipment. The Company expects
capital expenditures to be approximately $3.0 million over the next 12 months
due to anticipated openings of new Company-owned offices and further investments
in the Company's computer-based technologies.
The Company has a revolving line of credit agreement with Bank of America
and Union Bank providing for aggregate borrowings and letters of credit of $25.0
million. Interest on outstanding borrowings is payable monthly at the prime rate
or, at the Company's discretion, LIBOR plus 1.95%. The line of credit is
unsecured and expires on February 28, 1997. The principal use of the line of
credit has been to finance receivables, to provide a letter of credit required
in connection with the Company's California workers' compensation self-insurance
program to meet regulatory requirements and to finance distributions made to
shareholders. The Company had $6.7 million outstanding under its line of credit
and $4.8 million in undrawn letters of credit as of October 1, 1995. There were
$4.0 million borrowings under its line of credit and $4.0 million in undrawn
letters of credit as of June 30, 1996. The bank agreements governing the lines
of credit require the Company to maintain certain financial ratios and comply
with certain restrictive covenants.
On July 16, 1996, the Company completed an initial public offering of
3,565,000 shares of its Class A common stock at $13.00 per share (the Offering)
of which 2,093,333 were sold by the Company and 1,471,667 were sold by certain
pre-Offering shareholders. The net proceeds to the Company from the sale of the
2,093,333 shares of Class A common stock are estimated to be $23,708,396 after
deduction of the underwriting discount of $1,904,933 and estimated expenses
related to the offering of $1,600,000. A portion of the net proceeds were used
to finance distributions to the Company's pre-Offering shareholders (see
discussion below) with the remaining balance reserved for working capital and
other general corporate use. The Company did not receive any of the proceeds
from the sale of the shares of common stock offered by the pre-Offering
shareholders.
In conjunction with the Offering, the Company terminated its S corporation
status. As a result, the Company is required by the Internal Revenue Service
Code to change its method of accounting for income tax reporting purposes from
the cash basis to the accrual basis. The termination will result in a
non-recurring net charge to earnings in the fourth quarter of fiscal 1996
resulting from differences in the tax treatment of certain of the Company's
assets and liabilities under the cash and accrual methods of accounting and is
reflected through an increase in current and deferred income tax liabilities,
partially offset by an increase in the Company's deferred tax assets. The actual
current and deferred income tax assets and liabilities and the related income
tax provision will be recorded in the fourth quarter of fiscal 1996, based upon
temporary differences as of July 9, 1996, the effective date of the termination.
If the Company had ceased to be treated as an S corporation as of June 30, 1996,
the net charge would have been approximately $8.0 million. The actual charge to
earnings could be greater depending upon the Company's results of operations and
financial information as of the effective date of the termination. The Company
has not yet finalized its detailed calculation of the current and deferred
income tax assets and liabilities and the related income tax provision as of the
effective date of the termination. The income tax liability will be payable in
quarterly installments due over four years.
Prior to the Offering, the Company declared a distribution to the
pre-Offering shareholders in an aggregate amount equal to $5.0 million plus an
additional amount equal to the pre-Offering Shareholders income tax obligations
related to the Company's undistributed S corporation earnings from October 2,
1995 through the effective termination date of the Company's S corporation
status. If the Company's S corporation status had terminated as of June 30,
1996, the additional distribution would have been approximately
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$2.2 million. The actual amount of this distribution may be significantly higher
depending upon the Company's cash basis income from June 30, 1996 through the
effective date of the S corporation status termination. The Company has not yet
finalized the calculation of the additional distribution. The Company will pay
the additional distribution with proceeds of the Offering. The $5.0 million
amount described above was paid in May 1996 and was financed through borrowings
under the Company's line of credit agreement. Subsequent to the completion of
the Offering, the Company repaid such borrowings with the proceeds thereof.
SEASONALITY
The Company's quarterly operating results are affected by the number of
billing days in the quarter and the seasonality of its clients' businesses. The
first fiscal quarter has been historically strong as a result of manufacturing
and retail emphasis on holiday sales. The second fiscal quarter historically
shows little to no growth in comparable revenues from the first fiscal quarter.
Revenue growth has historically accelerated in each of the third and fourth
fiscal quarters as manufacturers, retailers and service businesses increase
their level of business activity.
12
<PAGE> 14
REMEDYTEMP, INC.
PART II -- OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
On April 27, 1996, the shareholders of the Company, in an action by
written consent, voted on two matters. First, shareholders representing
2,165,340 shares of the Class A Common Stock (shareholders representing
99,660 shares of Class A Common Stock did not vote on the matter) voted
to: 1) amend and restate the Articles of Incorporation of the Company
to provide for a reclassification of the Series A Common Stock and
Series B Common Stock to Class A Common Stock and Class B Common Stock,
respectively; 2) provide for a 1.812 for 1 stock split; 3) require that
the Bylaws of the Company be amended by shareholders only upon the vote
of holders of at least 66 and 2/3 of the shares entitled to vote; and
4) designate and delineate the rights associated with the Series A
Junior participating preferred stock. Additionally, shareholders
representing 2,165,340 of the shares of Class A Common Stock
(shareholders representing 99,660 shares of Class A Common Stock did
not vote on the matter) voted to amend and restate the Bylaws of the
Company to provide that when the Company becomes a "listed corporation"
within the meaning of the California Corporations Code, cumulative
voting rights will be eliminated and the Company's Board of Directors
will be divided into three classes.
Item 6 Exhibits and Reports on Form 8-K
(A) EXHIBITS
Set forth below is a list of the exhibits included as part of this
Quarterly Report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.1 Amended and Restated Articles of Incorporation of the Company*
3.2 Amended and Restated Bylaws of the Company*
4.1 Specimen Stock Certificate*
4.2 Shareholder Rights Agreement*
10.1 Robert B. McDonough, Sr. Amended and Restated Employment Agreement*
10.2 Paul W. Mikos Employment Agreement*
10.3 R. Emmett McDonough Employment Agreement*
10.4 Allocation Agreement with R. Emmett McDonough and Related Trusts*
10.5 Registration Rights Agreement with R. Emmett McDonough and Related Trusts*
10.6 Letter regarding terms of employment and potential severance of Alan M. Purdy*
10.7 Deferred Compensation Agreement for Alan M. Purdy*
10.8 Letter regarding potential severance of Jeffrey A. Elias*
10.9 Form of Indemnification Agreement*
10.10 Lease Agreement between RemedyTemp, Inc. and Robert E. McDonough, Sr.*
10.11 RemedyTemp, Inc. 1996 Stock Incentive Plan*
10.12 RemedyTemp, Inc. 1996 Employee Stock Purchase Plan*
10.13 Form of Franchising Agreement for Licensed Offices*
10.14 Form of Franchising Agreement for Franchised Offices*
10.15 Form of Licensing Agreement for IntellisearchSM*
10.16 Credit Agreement among Bank of America National Trust and Savings Association,
Union Bank and RemedyTemp, Inc. as amended*
10.17 Paul W. Mikos Promissory Note*
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference to the exhibit of same number to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-4276), as amended.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed in the fiscal quarter ended June 30,
1996.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 16, 1996 REMEDYTEMP, INC.
/s/ PAUL W. MIKOS
--------------------------------------
Paul W. Mikos, President and Chief
Executive Officer
/s/ ALAN M. PURDY
--------------------------------------
Vice President and Chief Financial
Officer (Principal Financial Officer)
14
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.1 Amended and Restated Articles of Incorporation of the Company*
3.2 Amended and Restated Bylaws of the Company*
4.1 Specimen Stock Certificate*
4.2 Shareholder Rights Agreement*
10.1 Robert B. McDonough, Sr. Amended and Restated Employment Agreement*
10.2 Paul W. Mikos Employment Agreement*
10.3 R. Emmett McDonough Employment Agreement*
10.4 Allocation Agreement with R. Emmett McDonough and Related Trusts*
10.5 Registration Rights Agreement with R. Emmett McDonough and Related Trusts*
10.6 Letter regarding terms of employment and potential severance of Alan M. Purdy*
10.7 Deferred Compensation Agreement for Alan M. Purdy*
10.8 Letter regarding potential severance of Jeffrey A. Elias*
10.9 Form of Indemnification Agreement*
10.10 Lease Agreement between RemedyTemp, Inc. and Robert E. McDonough, Sr.*
10.11 RemedyTemp, Inc. 1996 Stock Incentive Plan*
10.12 RemedyTemp, Inc. 1996 Employee Stock Purchase Plan*
10.13 Form of Franchising Agreement for Licensed Offices*
10.14 Form of Franchising Agreement for Franchised Offices*
10.15 Form of Licensing Agreement for IntellisearchSM*
10.16 Credit Agreement among Bank of America National Trust and Savings Association,
Union Bank and RemedyTemp, Inc. as amended*
10.17 Paul W. Mikos Promissory Note*
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference to the exhibit of same number to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-4276), as amended.
15
<PAGE> 1
EXHIBIT 11.1
REMEDYTEMP, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (1)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS
JUNE 30, ENDED
1996 JUNE 30, 1996
------------ -------------
<S> <C> <C>
Net income(1)..................................................... $1,884 $ 5,088
====== =======
Average shares outstanding...................................... 6,795 6,795
Common equivalent shares(2):
Assumed shares sold to prepay shareholder distribution....... 636 636
------ -------
Weighted average number of common shares........................ 7,431 7,431
====== =======
Earnings per common and common equivalent share................. $ .25 $ .68
====== =======
</TABLE>
- ---------------
(1) The computation set forth herein is based on pro forma net income which
reflects the recording by the Company of additional taxes as if the Company
were treated as a C corporation for all periods presented.
(2) Reflects the number of share required to e sold by the Company (as
calculated based upon the net proceeds of the initial public offering) to
prepay the shareholder distributions of approximately $5.0 million and the
$2.2 million pro forma distribution payable at June 30, 1996 as described in
Note 3 to the Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-START> OCT-02-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 37,106
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,526
<PP&E> 4,928
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,303
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 21,892
<TOTAL-LIABILITY-AND-EQUITY> 47,303
<SALES> 0
<TOTAL-REVENUES> 203,069
<CGS> 0
<TOTAL-COSTS> 153,189
<OTHER-EXPENSES> 42,002
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 8,480
<INCOME-TAX> 127
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,353
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
